By Lauren Bailey
Since its inception in 2021, the University Pension Plan of Ontario (UPP) has focused on building up its in-house capability and ensuring its total portfolio remains resilient enough to withstand any market climate, said Aaron Bennett, UPP’s chief investment officer, in an interview to Markets Group.
The pension plan generated a net return of 10.3% in 2024, growing its assets under management to $12.8B, according to its latest annual report, which also noted the plan remains fully funded and financially healthy.
“From the start of this journey, we’ve really built a portfolio . . . that can withstand volatility and uses diverse strategies across asset classes,” said Bennett. “We’ve implemented advanced risk management tools for a deeper total fund risk analysis to really increase the alignment between what we’re trying to do on the asset side of the investment portfolio and the primary purpose of that investment portfolio, which is to fund our members’ pensions.”
Global public equity was the highest-performing sector for the pension plan, returning 28.0%. The portfolio saw valuation and financing benefits, said the report, noting the pension fund’s new fee structures, which reward partners for exceeding their benchmarks — particularly in public equities — helped buoy asset classes’ results.
The private equity portfolio return substantially increased from in 2023 (0.5 vs -2.1%). Lower financing costs boosted returns in industrial, multi-family real estate, and infrastructure investments like digital infrastructure, renewable energy, and transportation. Its private debt portfolio generated 7.2%, compared to 6.1% in 2023.
UPP, whose head office is located in Toronto, Ont., has committed over C$1B to private markets between 2022 and 2024, which Bennett said includes six fund partnerships and eight direct or co-investments across all four of the private asset classes — private equity, private debt, real estate and infrastructure.
“[Co-investment] is another one of these key pillars that we’re really trying to bring into the mid-market and one that we’ve intentionally built. I’m really, really happy with the results we’ve had. . . . By targeting specific co-investments with our partners, we can construct the portfolio in a way that is more aligned with what we need in terms of risk and return. The capability to do co-investments requires scale and professionals and process to really execute in the way that is necessary to compete in the current marketplace.”
In particular, UPP is focusing on partnering with general partners (GPs) that offer limited partnership advisory committee seats for the fund, Bennett added. “As someone [who] sits on the LPAC, you tend to get a little bit more information [and] are involved in some decision-making for the overall fund side of things. It just gives you increased transparency and control. And, when you’re talking about illiquid assets like we are in private markets, that transparency and control can be very important.”
UPP touted outperformance of its absolute-return strategies portfolio as a significant contributor to the plan’s performance, noting the diversification it provided generated 14.7% in fiscal 2024, nearly double its return (8.8%) for the year prior. The portfolio is another tool the pension plan is using to execute on its mid-size version of the Canadian Maple 8 pension model.
“I think it’s one of several core pillars within our strategy to really bring many of the elements of the Canadian Maple pension model to mid-sized pension plans and provide our members the benefits of scale including the ability to invest in absolute-return strategies,” said Bennett.
Although many liken absolute strategies to hedge funds, he pointed out that UPP takes a more focused approach to ensure these investments are uncorrelated to the stock market or aren’t subject to fluctuating interest-rate movement.
“We’re not looking to benchmark it to equity benchmarks or fixed income benchmarks. It is an absolute-return benchmark. It is a cash plus benchmark, and it provides us a lot of different elements that really help us provide that diverse, resilient portfolio for our members that can fund their pensions through a variety of different economic environments.”
Systematic and credit managers performed well and achieved diversification with near-zero correlation to equity markets and negative correlation to fixed income markets.
Though fixed income returns were in the negatives (-2.1%), Bennett noted over the long term, the plan expects bonds will play a central role in managing the plan’s liabilities.
Among real assets, UPP’s infrastructure portfolio returned 8.4%, up from 6.7% last year. Real estate was the lowest-performing asset class, declining to -6.7% from -4.6% in 2023. Bennett pointed out that, while many of its peer group have been overweight in real estate, UPP is building up its allocation, albeit during a challenging time. “This allows us to deploy capital when others aren’t and to be selective. In addition, due to our mid-sized status, we don’t have to deploy large amounts of capital to make it matter to us, we can focus on niches.”
For now, Bennett said the plan is doing just that — focusing on niches with partners that are aligned across UPP’s investment beliefs and those that can provide investments more correlated in terms of their value and cash flows to inflation.
“For us, that means focusing on multi-residential, industrial [that is] very much on the logistics side, and then in certain niches like student housing, as well as life sciences and others. Going forward, I think we have some really exciting opportunities ahead of us that will help set up the portfolio for years to come for members.”